ITAT Ahmedabad held In the case of Shri Isharbhai Chotabhai Patel Vs. CIT that ld. Commissioner not justified in interfering in the discretion exercised by the AO without any plausible reason. The estimated opinion formed by the AO can only be interfered, if it is established on record that such an opinion was formed by the AO on misinterpretation or misconstruction of facts or based on extraneous reasons.

Facts of the Case

The assessee is an individual engaged in the business of construction. He has filed return of income on 29.9.2008 declaring total income of Rs.1,67,560/-.In an analysis of the accounts,the ld.AO found that the assessee has disclosed gross receipt ofRs.45,24,572/- from construction activities. He further observed that the true income cannot be deduced from the books of accounts provided by the assessee, and therefore, he rejected the book result and computed the profit of the assessee at the rate of 5% of the gross receipts. In this way, the ld.AO has worked out the assessable income of the assessee at Rs.2,26,230/- (5% of gross receipts ofRs.45,24,572/-).

On perusal of the record, the ld. Commissioner was of the opinion that the assessment order is erroneous and caused prejudice to the interest of the Revenue. According to the ld. Commissioner, the AO has estimated the income of the assessee by adopting the rate of profit at 5%, which is too low. In his opinion, the AO ought to have estimated the profit by applying the rate of 8% to the gross receipts. After hearing the assessee, the ld. Commissioner has set aside the impugned assessment and directed the AO to compute the income of the assessee by applying the net profit rate of 8% to the gross receipts disclosed by the assessee. According to the ld. Commissioner, the ld. AO failed to refer any material which goaded him to apply the rate of 5%.

Contention of the Assessee

The Assessee was aggrieved with the order of the ld. Commissioner of applying the rate of 8% of Gross receipts in place of 5% applied by the ld. AO.

The ld. counsel for the assessee submitted that the estimated opinion of the AO has been replaced by the Commissioner with another estimated opinion. The ld. Commissioner has also failed to assign any reason why the rate of 8% should be applied.

Contention of the Revenue

The learned DR contended that the ld. Commissioner has gone through the record. He noticed that the details of construction material, labour payments and misc. expenses are unverifiable. The assessee failed to submit supporting vouchers. Therefore, his income is to be computed on an estimate basis. The ld. Commissioner though did not apply section 44AD which provides a mechanism to compute the income of the assessee engaged in construction activity etc. At the rate of 8% of the gross receipts, if his turnover is less than Rs.40 lakhs, in that case, the assessee is not supposed to maintain books of accounts. But for the purpose of guidance to arrive at a conclusion, what profit the assessee must have earned? The ld. Commissioner has referred to this section. Looking into this background, he set aside the assessment order and estimated the income of the assessee by applying net profit at 8%.

Held by ITAT

The Hon’bleITAT took note of the fundamental tests propounded in various judgements relevant for judging the action of the CIT taken u/s 263. It also relied upon the case of Mrs. Khatiza S. Oomerbhoy Vs. ITO, Mumbai, 101 TTJ 1095 wherein the Hon’ble ITAT had analysed in detail various authoritative pronouncements including the decision of Hon’ble High Court in the case of Malabar Industries 243 ITR 83.

The Hon’ble ITAT held that ld. Commissioner has not assigned any reason as to why net profit at the rate of 8% should be applied to the gross receipts of the assessee for estimating his income. The ld. Commissioner is not justified in interfering the discretion exercised by the AO without any plausible reason. The estimated opinion formed by the AO can only be interfered, if it is established on record that such an opinion was formedby the AO on misinterpretation or misconstruction of facts or based on extraneous reasons. No such thing has been pointed out by the ld. Commissioner in the impugned order.

Therefore, the order of the ld. CIT(A) is not sustainable in the eyes of law.